MANAGED CARE July 1997. ©1997 Stezzi Communications

If Congress tightens the belt on Medicare HMOs, it could slow the march of elderly Americans into managed care, creating complications for physicians. But that march won't be stopped.

Medicare needs a financial fix, and needs it badly. That fact hasn't escaped the attention of any headline-browser in recent months. President Clinton and Republican congressional leaders have agreed on the outlines of a budget agreement that would cut the growth of the $170 billion annual program by $115 billion over five years. But the legislation has yet to be enacted, and the details agreed upon.

In that larger context, the budgetary afflictions of Medicare's 12-year-old HMO program look as minor as a skin rash on a heart-failure patient. After all, only about 10 percent of Medicare beneficiaries are enrolled in HMOs. But it is nevertheless noteworthy that managed care, which was expected to reap big savings for the government in Medicare, has so far cost the government money instead.

"Researchers have concluded that Medicare payments to HMOs are five percent or more higher than fee-for-service reimbursements would have been for these beneficiaries," note Kathryn M. Langwell and Dan Sherman, Ph.D., of the Washington- based research organization Barents Group LLC, in a recent report prepared for the Henry J. Kaiser Family Foundation.

The problem arises because for each enrollee Medicare pays HMOs 95 percent of the average adjusted per capita cost of treating fee-for-service Medicare beneficiaries in the county the enrollee lives in. But in setting up this payment methodology, the government didn't take adequate account of the fact that the first seniors to venture into the HMO world tend to be those silver-haired joggers and tennis players you see in commercials, who require far fewer health care services than their agemates do. In this group, the difference between the robust and the decrepit far outweighs a 5-percent discount.

The result has been something of a bonanza for pioneering Medicare HMOs — but the bonanza won't last. Just as the recent budget deal suggests, Congress is, in the careful words of the Barents Group report, "likely to consider a number of alternatives for reducing projected Medicare spending in the coming years." And one of those alternatives may well be adjusting the program's HMO payment methodology to stanch the flow of red ink.

The report, "Changes in Medicare HMO Payment Policy: Effects on HMO Participation, Benefits and Medicare Enrollment," gives number-crunching answers to the question of what's likely to happen to managed Medicare if — or more likely, when — this tinkering takes place. The short answer: a slowing of growth for Medicare HMO enrollments, perhaps, but continued growth nonetheless.

"Changing the payment methodology could reduce Medicare costs, relative to current policy," authors Langwell and Sherman write. And while this would slightly reduce the growth rate of managed Medicare and increase costs for some beneficiaries, they say, their analysis suggests that "these impacts would not be dramatic."

In other words, the elderly will keep moving into managed care even if the government stops subsidizing that move quite so generously. While today roughly 4.5 million Americans 65 and older receive care through HMOs, their ranks are expected to swell to 7.7 million under current policy. The report describes simulations of the effect of an across-the-board 5-percent cut in payment rates to HMOs, and finds that such a cut would bring that 7.7 million down to 7 million. But that's still quite a crowd.

Langwell and Sherman do predict that if per-capita payments to Medicare HMOs are trimmed, then:

  • Fewer HMOs would participate in the program than would otherwise;
  • Fewer Medicare beneficiaries would be offered and would choose an HMO option;
  • HMOs would increase the premiums they charge individuals for supplemental benefits, and
  • There would be some decrease in the generosity of benefits offered by HMOs.

Why less generous benefits? That's because the Medicare risk contract program requires HMOs to return, in one way or another, expected surpluses from the payments they receive for providing basic benefits. Such surpluses can be used to fund supplemental benefits for enrollees or reduced "cost-sharing" — that is, reduced charges for the enrollee — or they can be returned to the Health Care Financing Administration, which manages Medicare. (Somehow, sending cash back to Washington isn't always a tempting option.) It stands to reason that if surpluses shrink, so might supplemental benefits such as prescription drugs, eye exams and dental care.

Current Medicare HMO enrollees often enjoy free or bargain-basement premiums. From 1994 to 1996, average monthly premiums nosedived from $32 to $14, and the proportion of plans offering zero premiums (that is, asking beneficiaries to pay no premium beyond their monthly Medicare Part B contribution) rose from 50 percent to 63 percent.

What's in store for Medicare HMOs and the physicians they contract with if the system's payment methodology is changed? "A reduction in the payment level might create incentives for HMOs to become more efficient in managing the utilization of Medicare enrollees and to negotiate more favorable payment rates and risk agreements with providers," Langwell and Sherman speculate [emphasis added].

The latter possibility will no doubt inspire the vigilant attention of managed care physicians. If HMOs reduce the comprehensiveness of the benefits to accommodate reduced per-capita payments, physicians could be in the position of providing a lower level of care. It's possible that, to handle the cuts, doctors would have to schedule more patients per hour, which would mean spending less time with each Medicare beneficiary. Or they might feel pressured to limit the num- ber of Medicare patients they treat.

Both physicians and HMOs might be on their guard lest government do with its managed Medicare payment methodology what it has done in other situations — overcorrect a problem, lurching too far in the opposite direction.

After all, simple math suggests that the larger the contingent of older Americans enrolled in HMOs, the less sharply they will differ in health care needs from the norm for their age. And that contingent will keep on growing. Langwell and Sherman point out that even less-generous Medicare HMO coverage could be an attractive option if it supplants the supplemental "Medigap" insurance policies for which many Medicare beneficiaries now pay separate premiums. Beyond that, there will be a stream of working-age HMO enrollees, accustomed to managed care, who "age in" to their HMOs' Medicare options.

Before the 'boomers'

Currently, Sherman says, "Medicare HMO beneficiaries get extra benefits and decreased copayments." Those generous benefits and lower out-of-pocket charges have surely contributed to the recent surge in Medicare HMO enrollment. But the surge has other causes, too.

In 2011, when the first of the "baby boom" generation turns 65, Medicare will face a demographic challenge requiring all the known techniques of population-based medicine — and then some. But over the next five years, says Sherman, "The number of Medicare beneficiaries is not going to increase that much. What will change is what share of those people are involved in the risk-contract HMO program."

The Congressional Budget Office says that by 2002, assuming the continuation of today's payment methodology and the requirement for returning surplus to beneficiaries or to HCFA, the proportion of Medicare beneficiaries in the risk program will increase from 10 percent to 25 percent. Assuming a 5-percent across-the-board cut in payments to HMOs, that number instead would "only" double, to 20 percent.

Whatever happens within the range of foreseeable adjustments to managed Medicare's payment methodology, apparently no last rites for the Medicare HMO will be required.

Reasons for HMOs' growing interest in Medicare risk contracting

  • In areas of heavy managed care penetration, the Medicare population is often one of the last untapped market opportunities
  • In markets with low managed care penetration, opportunities exist because so little medical care is managed
  • "Aging-in" previously working-age members is a way to maintain market share
  • Market forces are pressuring physicians and other providers to take on more of the risk, making expansion less chancy for HMOs

Tinkering won't stop growth of Medicare HMOs

Changing the way Medicare HMOs are paid could slow their growth a little bit, say researchers Kathryn M. Langwell and Dan Sherman, Ph.D., of the Barents Group in a recent report. But such adjustments won't dramatically alter the bullish forecast reflected in Congressional Budget Office estimates, below.

Increase in managed care enrollment among Medicare beneficiaries, 1987 - 2007

1987–1995: actual; 1997–2007: projected.

Medicare HMOs: A dip, then a rebound

The number of HMOs offering Medicare coverage was actually greater in 1987 than it was a few years later. After bottoming out in 1991, it made up lost ground by 1994, and kept climbing. The climb seems likely to continue.

HMOs offering Medicare risk plans, 1987–1996

How supplemental benefits might be cut

If the payment methodology for Medicare HMOs becomes less generous, some enrollees may lose supplemental benefits they now enjoy. Here are estimates of such losses if there is an across-the-board 5-percent cut in the payments, and if payments (now based on local averages) are smoothed out on a national average basis.

Estimated reductions in number of enrollees receiving certain benefits

Benefit Number now receiving benefit Percentage losing benefit with 5% payment cut Percentage losing benefit with nat'l average rates
Ear care 1,780,000 2.5 3.7
Drugs 1,340,000 2.2 3.3
Dental 730,000 4.7 6.8

SOURCE NOTE: Charts, map and boxed information in this article are adapted from "Changes in Medicare HMO Payment Policy: Effects on HMO Participation, Benefits and Medicare Enrollment," prepared for the Henry J. Kaiser Family Foundation, Washington, by Barents Group LLC, Washington. (For a copy of the report, call the foundation at (800) 656-4533.) Projections of future Medicare HMO enrollment draw upon estimates by the Congressional Budget Office, Washington, and map percentages are calculated by Barents study authors based on data from the Health Care Financing Administration, Washington.

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